FOR-PROFIT NURSING FACILITIES IN TROUBLE

With five of the largest seven for-profit nursing home chains currently operating in Chapter 11 bankruptcy, and with virtually all nursing home stocks at an all-time low, we are witnessing the virtual collapse of an industry that has been in existence (for all practical purposes) for fewer than 20 years.

What happened? And what does it mean for Florida?

During the early 1980s, hospital beds began overflowing with patients in need of rehabilitative care. As a result, the medical community, along with federal regulators, developed a system to move many rehabilitation patients into skilled nursing facilities.

With generous Medicare reimbursements, the growth in skilled nursing facilities skyrocketed. We went from a system of non-profit and faith-based "rest homes" to large, corporate-owned nursing home chains. The General Accounting Office reports that Medicare spending for skilled nursing facilities grew from $578 million in 1986 to $13.6 billion in 1998.

Florida in particular felt this growth more dramatically than the rest of the country, as we became a retirement destination. Additionally, the for-profit chains saw the state as a profitable market and, as a result, Florida has one of the highest ratios of for-profit beds in the country, at over 85 percent.

Unfortunately, along with this incredible growth came widespread mismanagement and fraud. This endemic corruption among for-profit nursing home owners was first made public in a 1995 GAO Report titled Medicare: Tighter Rules Needed to Curtail Overcharges for Therapy in Nursing Homes. Since that report, SEC filings of the for-profit chains document widespread allegations of Medicare fraud, insider trading and securities fraud, false claims, breach of fiduciary duty, and unjust enrichment.

Earlier this year, for example, Beverly Enterprises, a publicly traded chain that operates more than 60 homes in Florida, pleaded guilty to fraud and agreed to pay a settlement of $175 million after the government claimed that it stole more than $460 million.

Unfortunately, the Beverly case is not unique: Charges of corruption, false claims and Medicare fraud continue to surface throughout the country.

The U.S. Congress attempted to slow runaway spending and industry-wide malfeasance by changing the method of reimbursement with the infamous Balanced Budget Act (BBA) of 1997. The new rules -- written with significant industry input -- were set up to pay homes a fair wage for care they were to provide while making it more difficult for homes to systematically charge for unnecessary or overpriced care.

The BBA failed, however, to account for the overwhelming debt of the for-profit chains. According to virtually every health policy analyst, the 1990s was a period of unchecked growth and a disregard for sound money management policies. (For example, Integrated Health Services, which operates over 40 homes in Florida, was $3 billion in debt prior to declaring bankruptcy earlier this year and its CEO, Robert Elkins of Naples Florida, was cited by Forbes magazine as the most overpaid executive in America.).

As a result, the chains were unable to handle their debt and had no option but to turn to the courts for protection. Consequently, companies operating under Chapter 11 bankruptcy own more than 1 in 5 nursing home beds in Florida.

Which brings us to the current state of the nursing home industry.

In short, we now have an industry dominated by large for-profit chains. It relies almost exclusively on the good fortune of massive government programs, with the lion's share of revenues coming from Medicare and Medicaid. As a result, operators and owners get paid regardless of the quality of service delivered. And, of course, this all takes place in an environment that is virtually without competition. (Try getting Medicaid to pay for at-home or alternative care.)

Big government spending, payments unrelated to quality of service and no real competition -- can we be shocked that this has lead to widespread corruption and inefficiency?

Florida has a chance to stop the bleeding. The Task Force on the Availability and Affordability of Long-term Care is examining this industry, where it has come and where it is headed. This is a rare opportunity to shape the future of long-term care in this state and improve not just the quality of care but the quality of life for our most frail and vulnerable citizens.

With more competition, a wider array of choices for consumers, and a greater accountability of providers, our state can become a model for others to follow.